Individual Retirement Account Rollovers

I’m leaving my previous employer, and that means I need to decide what to do with my employer-managed retirement plan. Should I roll my 401(k) into an IRA (Individual Retirement Account). If so, how do I make that transition, and what do I do with the funds?

Rolling over into an IRA is a great idea.

A lot of retirement plans are obviously locked into an employer 401(k) plan. Unfortunately, as an employee of that business, you're restricted with what you can do with those funds. But when you leave, you have the option to roll over into something more self-directed, like an IRA. That’s a smart move.

• IRAs serve your interests better. For one thing, 401(k)s are designed by employers to serve their own needs and interests. The employer often serves as administrator of the plan and oversees putting the different investment options in there. The employee has very little say. In other words, 401(k)s are very restrictive. So, when you leave an employer, your investment world opens up to include more self-directed options and situations where you can have someone like me manage your portfolio. Either way, you can now access anything and everything that’s publicly traded in order to put together the right portfolio for you.

• IRAs are more transparent. In a 401(k), you’ll likely have a lot of mutual funds, exchange-traded funds (ETFs), and similar investment vehicles that are not very transparent. That means you don't really know what you own and have limited (or no) ability to get more information. With an IRA, it’s very transparent. You know exactly what you own. Outsourcing an IRA to a manager like me further means I can handle a task that’s probably outside your primary expertise but in a way that gives you total insight into what’s happening with your money with an ability to investigate further, ask questions, and gain understanding.

Should you do self-directed or managed?

There’s no one-size-fits-all answer to this question. A self-directed IRA functions basically like any brokerage account. If you choose to manage it yourself, just make sure you have the expertise and the emotional IQ to do so. Or you can do something that is more active, which is to have someone like me manage the IRA on your behalf.

Within each of those two categories – self-directed or managed – you also have the option to invest in mutual funds or individual stocks, or just fixed income or anything else that is publicly accessible.

If you are considering a managed approach, you want to ensure there’s a philosophical and attitudinal fit between yourself and the manager. You want to verify that they invest in a way that makes sense and is intuitive to you. If it doesn't make sense to you, then it’s probably not going to be a winning relationship.

For example, if you're someone that thinks that high frequency trading is the way to make money, then a manager with low-to-medium turnover – who’s more focused on long-term value production – is probably not the right one for you. If your beliefs don’t totally align with your manager’s, are you willing and able to adjust your beliefs, assuming your manager’s approach has good reasoning behind it?

You also want to do the same kind of due diligence you’d do with any other professional relationship, like an accountant, lawyer, or doctor. The patient or the client doesn't want to be in the dark about what's happening, but at the end of the day, they are leaning on the expertise of that individual.

I’ve written more about what to look for in an investment manager here.

What are some of the questions you ask a new customer when they're going through this process?

Be aware that many of the questions discussed above are questions the manager or advisor is asking too.

I have turned away a lot of clients myself because the cost of bringing in a bad fit exceeds the reward. If they're constantly moving money around or if they are on some get rich quick path, or if they're fixated on talking about what's popular and trendy, that will at least raise a red flag for me. We may not be a good fit, because I tend to hold fewer assets for longer periods of time. So, I will want to know the person’s history going into the relationship.

The reason I ask these questions is because this is a journey we’re taking together, and I want to make sure that:

1. They’re comfortable with me in the driver’s seat, but also

2. They understand I don’t want to put them in the trunk; I want them up front with me!

In other words, I need to have final say over what goes into the portfolio, but I also encourage my clients to be involved in following what I’m doing, to ask questions about it, and to understand why I make the decisions I do.

Does it matter where I am in the retirement lifecycle?

Self-directed or managed, the process is going to be customized to your individual needs. Younger people with longer runways (more time to build wealth) can be more aggressive. Older people closer to retirement will want to structure their investments a bit more conservatively.

But this brings us back full circle to why IRAs are a great option when leaving an employer. It brings you to a place with a lot of transparency and a lot of investment flexibility. And, if you work with a manager, it creates a partnership that can fill the gap in an area outside of their own professional qualifications.